Sandy's Insured-Loss Tab: Up to $20 Billion

By

Erik Holm And

Leslie Scism

Updated Nov. 2, 2012 9:41 a.m. ET

Hurricane Sandy may cost the insurance industry up to $20 billion, a tally that would put this week's devastating storm second only to 2005's Katrina for insured losses, according to a new damage estimate.

Hurricane Sandy may cost the insurance industry as much as $20 billion, which would put this week's devastating storm second only to Hurricane Katrina for insured losses, according to a new damage estimate. Erik Holm has details on The News Hub. Photo: Fox.

Disaster-modeling firm Eqecat Inc. said the insurance industry is likely to pay out between $10 billion to $20 billion, while it said the total cost of the storm would be between $30 billion and $50 billion.

The storm struck some of the most populous parts of the country, causing widespread damage over an area with about $20 trillion in insured assets, said David Smith, Eqecat's senior vice president of model development, on a conference call discussing his company's estimate.

Before the storm made landfall Monday, Eqecat had said insured losses could be between $5 billion and $10 billion. Another firm, AIR Worldwide, said Tuesday the storm likely caused between $7 billion and $15 billion in insured losses.

More

Wall Street analysts had said early this week the insurance industry would have no trouble digesting the costs of the storm, but estimates of the storm's pricetag keep climbing. Still, property-casualty insurers are considered flush with cash, and several reported record profits in this year's third quarter.

Fitch Ratings said Thursday that the insurance industry will be able to absorb even the losses predicted in the latest Eqecat estimate, "given its solid capital position" and the dearth of expensive disasters in 2012 before now.

"At the high end of the range, a $20 billion loss represents a manageable 4% of U.S. industry capital," Fitch said.

But uncertainty abound. Fitch cited "the complexity of assessing insurance losses from such a large, intense storm over a widespread region, particularly with respect to the sizable flooding." While standard homeowners' policies don't cover flooding, many business policies do.

Estimates from Eqecat and other disaster-modeling firms are tracked closely by the insurance industry for the early indications they give on the likely costs of major disasters. The insurers themselves likely won't have a full understanding of the true costs of the storm for weeks or months.

Still, claims are mounting. State Farm Mutual Automobile Insurance Co., the largest home and auto insurer in the U.S., said Thursday that it had already heard from 42,000 homeowners and 8,000 auto policyholders about potential claims. Nationwide Mutual Insurance Co. said it had more than 11,000 claims across 15 states and the District of Columbia.

The chief executive of Allstate Corp.ALL-0.30%, the No. 2 home and auto insurer, said his company "may not have enough information to develop a credible estimate by Nov. 15," when the company would traditionally alert shareholders to its October catastrophe losses.

But the CEO, Tom Wilson, said on a conference call with analysts Thursday the storm is "not expected to have a material impact on our financial condition."

As disaster estimates escalate, it becomes more likely that insurers like Allstate and Nationwide will share some of the costs with the reinsurance industry, which is clustered in Bermuda and spread across Europe. Reinsurers sell backup protection to help insurers absorb the costs of large disasters.

Fitch estimated primary insurers—companies that sell policies to home and car owners and businesses—will bear a greater share of losses at the low end of the current cost estimate, and as industry losses reach $10 billion and higher, the reinsurance industry will receive a greater share of losses.

Indeed, Allstate executives noted they have a substantial reinsurance program that kicks in when losses reach predetermined levels. The program includes specific coverage for New Jersey, the state where Sandy made landfall.

Millions of people across the Northeast are still without power after Sandy swept across the most populous part of the country early this week. Eqecat said Thursday that the power outages "will trigger significantly more insured losses…than were expected" from a storm of Sandy's intensity.

In addition, the closures of major roads, tunnels and the New York City subway system are likely to drive up claims for a type of coverage called "business interruption" higher, Eqecat said.

Business-interruption coverage pays out when a company suffers from a decline in revenue as a result of a disaster covered by insurance. Linda Kornfeld, an attorney at Jenner & Block in Los Angeles, said businesses all across Manhattan may have the ability to recover money under their business-interruption policies if employees, customers or supplies were unable to reach them, even if they didn't suffer physical damage.

But she said this type of near-total shutdown of Manhattan was unprecedented and insurers are likely to fight some claimants over the interpretation of their policies.

"There likely hasn't been much discussion in the past about this between insurers and Manhattan businesses," said Ms. Kornfeld, who represents companies in disputes with insurers. "No one said, 'let's talk about what happens when a super-storm hits Manhattan and the subway shuts down.' Until now, how the business-interruption coverage would work in that scenario hasn't really been debated all that much."

Some insurance-industry and policyholder lawyers are predicting the estimated losses will continue to rise. Sandy's widespread destruction is likely to give rise to mountains of litigation as hard-pressed policyholders seek to recover every dollar they can from insurers. Those efforts will raise insurers' litigation-defense costs, even when they don't result in actual payouts to clients.

William Krekstein of Nelson Levine de Luca & Hamilton, a firm that often represents insurers, predicted "droves of disputed claims and ensuing litigation."

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.